Forced Technology Transfer and the WTO

The United States would be pleased to discuss at length the seriously trade distorting policies adopted by China that are the subject of the ongoing Section 301 investigation mentioned in China’s statement. It is these policies, and not responses by the United States or other Members, that are a threat to the international trading system.

...

The [Section 301] report contains extensive evidence that China engages in the following four types of practices involving technology transfer:

First, China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from U.S. companies.

Second, China’s regime of technology regulations forces U.S. companies seeking to license technologies to Chinese entities to do so on non-market-based terms that favor Chinese recipients.

Third, China directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate the transfer of technology to Chinese companies.

Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies to access their sensitive commercial information and trade secrets.

These policies harm every Member, and every industry in every Member, that relies on technology for maintaining competitiveness in world markets and increasing its people’s standards of living.

Instead of addressing its harmful policies, China accuses the United States of “unilateralism.”

This criticism has absolutely no validity. The United States made no findings in the Section 301 investigation that China breached its WTO obligations.

From the outset of the investigation, the United States was clear that where an act, policy, or practice appeared to involve WTO rules, the United States would pursue the matter through WTO dispute settlement.

In fact, one of the areas of investigation – involving technology licensing – appears to be amenable to WTO dispute settlement. In particular, certain technology licensing measures adopted by China appear to deny patent rights to foreign IP holders and discriminate against foreign IP holders. Thus, China’s measures appear to be inconsistent with China’s obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs Agreement).

Accordingly, last Friday, March 23, 2018, the United States initiated a WTO dispute on this issue. The consultation request has been circulated, and WTO Members may review the request to see the TRIPS Agreement issues involved.

And to be absolutely clear, the United States made no findings in the Section 301 investigation that the licensing measures at issue are inconsistent with China’s TRIPs Agreement obligations. Rather, as for any WTO dispute, the matter will be resolved by the parties or findings may be sought through WTO dispute settlement.

In contrast, the three other categories of measures covered in the U.S. investigation do not appear to implicate specific WTO obligations. Nonetheless, if China wishes to inform the DSB that the three other sets of acts, policies, and practices covered in the Section 301 investigation do amount to breaches of WTO rules, it may do so now.

According to the U.S., the second type of practice identified in the Section 301 report, involving technology licensing, is "amenable to WTO dispute settlement," and the U.S. therefore filed a WTO complaint. But, the U.S. says, the other three categories "do not appear to implicate specific WTO obligations," and therefore the U.S. did not file WTO complaints.

But what about the first practice described by the U.S.? The U.S. says: "China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from U.S. companies." Is this covered by WTO obligations? Section 7(3) of China's Accession Protocol states:

... China shall ensure that the distribution of import licences, quotas, tariff-rate quotas, or any other means of approval for importation, the right of importation or investment by national and sub-national authorities, is not conditioned on: whether competing domestic suppliers of such products exist; or performance requirements of any kind, such as local content, offsets, the transfer of technology, export performance or the conduct of research and development in China.

The key language here is that "means of approval for ... the right of ... investment" must not be "conditioned on" "the transfer of technology." Along the same lines, paragraph 203 of the Working Party Report, which was incorporated into the Protocol, says: "The allocation, permission or rights for … investment would not be conditional upon performance requirements set by national or sub-national authorities, or subject to secondary conditions covering, for example, the conduct of research, the provision of offsets or other forms of industrial compensation including specified types or volumes of business opportunities, the use of local inputs or the transfer of technology." (Thanks to Julia Qin for pointing these provisions out in the comments a while back).

As described by the U.S. above, the concern related to this first practice is investment restrictions being used "to require or pressure technology transfer." Isn't the practice identified by the U.S. covered by the obligation in Section 7(3)? Of course, whether there is a violation in this case can only be determined by applying WTO law to the specific measures at issue. But it seems like there is a good argument that the U.S. concerns are covered by the obligation.

Comments

The United States would be pleased to discuss at length the seriously trade distorting policies adopted by China that are the subject of the ongoing Section 301 investigation mentioned in China’s statement. It is these policies, and not responses by the United States or other Members, that are a threat to the international trading system.

...

The [Section 301] report contains extensive evidence that China engages in the following four types of practices involving technology transfer:

First, China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from U.S. companies.

Second, China’s regime of technology regulations forces U.S. companies seeking to license technologies to Chinese entities to do so on non-market-based terms that favor Chinese recipients.

Third, China directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate the transfer of technology to Chinese companies.

Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies to access their sensitive commercial information and trade secrets.

These policies harm every Member, and every industry in every Member, that relies on technology for maintaining competitiveness in world markets and increasing its people’s standards of living.

Instead of addressing its harmful policies, China accuses the United States of “unilateralism.”

This criticism has absolutely no validity. The United States made no findings in the Section 301 investigation that China breached its WTO obligations.

From the outset of the investigation, the United States was clear that where an act, policy, or practice appeared to involve WTO rules, the United States would pursue the matter through WTO dispute settlement.

In fact, one of the areas of investigation – involving technology licensing – appears to be amenable to WTO dispute settlement. In particular, certain technology licensing measures adopted by China appear to deny patent rights to foreign IP holders and discriminate against foreign IP holders. Thus, China’s measures appear to be inconsistent with China’s obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs Agreement).

Accordingly, last Friday, March 23, 2018, the United States initiated a WTO dispute on this issue. The consultation request has been circulated, and WTO Members may review the request to see the TRIPS Agreement issues involved.

And to be absolutely clear, the United States made no findings in the Section 301 investigation that the licensing measures at issue are inconsistent with China’s TRIPs Agreement obligations. Rather, as for any WTO dispute, the matter will be resolved by the parties or findings may be sought through WTO dispute settlement.

In contrast, the three other categories of measures covered in the U.S. investigation do not appear to implicate specific WTO obligations. Nonetheless, if China wishes to inform the DSB that the three other sets of acts, policies, and practices covered in the Section 301 investigation do amount to breaches of WTO rules, it may do so now.

According to the U.S., the second type of practice identified in the Section 301 report, involving technology licensing, is "amenable to WTO dispute settlement," and the U.S. therefore filed a WTO complaint. But, the U.S. says, the other three categories "do not appear to implicate specific WTO obligations," and therefore the U.S. did not file WTO complaints.

But what about the first practice described by the U.S.? The U.S. says: "China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from U.S. companies." Is this covered by WTO obligations? Section 7(3) of China's Accession Protocol states:

... China shall ensure that the distribution of import licences, quotas, tariff-rate quotas, or any other means of approval for importation, the right of importation or investment by national and sub-national authorities, is not conditioned on: whether competing domestic suppliers of such products exist; or performance requirements of any kind, such as local content, offsets, the transfer of technology, export performance or the conduct of research and development in China.

The key language here is that "means of approval for ... the right of ... investment" must not be "conditioned on" "the transfer of technology." Along the same lines, paragraph 203 of the Working Party Report, which was incorporated into the Protocol, says: "The allocation, permission or rights for … investment would not be conditional upon performance requirements set by national or sub-national authorities, or subject to secondary conditions covering, for example, the conduct of research, the provision of offsets or other forms of industrial compensation including specified types or volumes of business opportunities, the use of local inputs or the transfer of technology." (Thanks to Julia Qin for pointing these provisions out in the comments a while back).

As described by the U.S. above, the concern related to this first practice is investment restrictions being used "to require or pressure technology transfer." Isn't the practice identified by the U.S. covered by the obligation in Section 7(3)? Of course, whether there is a violation in this case can only be determined by applying WTO law to the specific measures at issue. But it seems like there is a good argument that the U.S. concerns are covered by the obligation.